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Monday, August 1, 2016

You've heard of belt and braces. You may even have heard of one country, two systems. But have you heard of One Belt, One Road? No, I thought not. Rest assured, you will.

It's a topic much discussed in business and economic circles in China, as I learnt on a visit there sponsored by the Australia-China Relations Institute at the University of Technology, Sydney.

It's a plan for the establishment of a new Silk Road between Europe and China, to increase trade and cultural exchange between all the countries along the route.

It's an initiative of the Chinese government, first announced by President Xi Jinping​ in 2013, and much elaborated since then.

The belt refers a land-based Silk Road Economic Belt running through China to Central Asia to Russia and Europe.

The road refers to a sea-based Maritime Silk Road taking in the countries of south-east Asia and running through the Indian Ocean to the countries of South Asia, then through the Suez Canal to the Mediterranean.

To keep muddling metaphors, the maritime "road" may even have a spur line to Africa. In principle, more than 60 countries could be involved.

It may sound like a politicians' grand vision that won't get far. That's certainly the way some American critics have reacted to it. There could be much suspicion, resentment and resistance to China's expansion plans from countries and their citizens, they say.

But while pollies talk big in Western countries, in China they tend to act big. Making the initiative a reality would involve much spending on infrastructure such as sea ports, airports, railways, highways, oil and gas pipelines, power stations and special economic zones.

China has much to gain from all this, of course. Its existing development activity in certain African countries suggests it would supply much of the materials and labour for infrastructure projects.

Should the oft-predicted economic "hard landing" eventuate and lead to rapidly rising unemployment at home, its desire to get on with foreign construction projects might be heightened.

Establishing a new Silk Road means China, already the world's largest trading nation, would greatly expand its export opportunities.

But trade between a willing buyer and willing seller is mutually beneficial. And increased trade could do much to hasten the economic development of the "stans" of Central Asia - such as Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

Already there is much interest and activity in Pakistan.

Geoff Raby, a former Australian ambassador to China, has observed that the initiative is "of great strategic significance for Beijing, as it is also intended to reduce China's major strategic vulnerability caused by so much of its seaborne trade, especially crude oil, having to go through the Strait of Malacca".

As an aside, this vulnerability also helps explain China's sensitivity over the South China Sea.

Full implementation of the initiative could take decades, of course. But a solid start has already been made. For instance, a freight rail link between the south-western China province of Sichuan (the one with the spicy food) and Lodz in Poland is now running three trains a week.

This fits also with the Chinese government's earlier - and continuing - Go West campaign to move economic activity - particularly labour-intensive manufacturing - inland from the richer coastal provinces, where labour is getting ever-more expensive.

But have you noticed something? The many countries that could get involved with the initiative include Indonesia, but not us.

At least, not directly. There is scope, however, for Australian banks and other financial institutions help facilitate the funding of infrastructure projects.

Much of the construction of projects will be done by big Chinese state-owned enterprises. We could, of course, sit back and hope this leads to restored demand for our coal and iron ore.

But the SOEs will often need to partner with foreign firms able to provide the specialist expertise they lack in in such things as engineering and major construction.

Many Australian companies are well-equipped to supply such consulting services, but to-date our firms have shown limited appetite for the higher risks involved in developing country projects.

Much safer to limit your innovation and agility to pressing the government for "reforms" that cut the tax you pay or allow you to drive harder bargains with your employees.

But not to worry. There are Japanese and South Korean firms who'll be happy to eat the Chinese lunch we don't fancy.